Protecting Yourself From Legal Troubles

A year ago I was sued by a billion-dollar firm, a giant on the NASDAQ, for a sum in the six-figure range. My crime? They alleged I’d viciously tried to violate their copyright, broke no fewer than 10 provisions of the Copyright Act and tried to extort money from them. That I’d never heard of them, never spoken to them or never written them was never mentioned in their brief. Welcome to the American legal system.

If this sounds bizarre to you, I assure you it was. When I was fresh out of college and hungry for work, one of my clients, a lawyer, asked me to register a few domain names with Network Solutions. I did, and promptly forgot them. Years later, a huge media company—whose name I’ll leave out—tried to buy the domains. When they were stymied by the owner, they sued everyone whose name was on the registration, including me, though I was just a techie who’d filled out the forms.

The lawsuit never went to court, and I settled without paying a dime. But the loss in time, lawyer’s fees and peace of mind was steep. Rare is the consultant who avoids the legal minefield completely, but the smart consultant knows how to walk around the mines.

Hence, some advice on avoiding a lawsuit. Of course, it comes with a caveat: I’m not an attorney (frankly, I’m none too fond of attorneys), and this is not qualified legal counsel. Before you do anything, find a good lawyer and pepper him with questions.

It’s All in the Contract First things first. Unless your client is Mother Theresa or some other latter-day saint—and these, I promise you, are few—never start a job without a written contract. The laws for verbal contracts vary widely by state, and when things head south, as they often do, how can you prove the nature of your agreement? A lawsuit’s outcome rides on the details, and for that you need a written record.

Not that it has to be fancy. In fact, the best contracts are written in clear, simple English, free of doubletalk, lawyer-speak and fancy prose. This has two benefits: First, everyone knows the exact nature of the agreement, and nothing is lost in the ether of bad writing. Second, when the language is kept simple and clean, you can write the contract yourself (though it’s wise to have a lawyer look at the final draft).

When you write your contracts, start with the basics: who you are, who the client is and how long the contract will last. Then explain what you’ll do, what deadlines you’ll meet and how you’ll do it. And so on. Don’t be afraid to be detailed. State how and when you’ll be paid, and what happens if payment is late. (Is there a penalty? Will interest be charged?) Last, sign and date a copy and make your client do the same, then keep the contract forever. You never know when you’ll need it.

If you’re doing a long, intricate project, attach a Production Schedule and Statement of Scope to the contract. The Production Schedule outlines the daily or weekly deadlines you’ll have to meet. The Statement of Scope details your work in depth, down to the last jot and tittle, and keeps the client from expanding the project by degrees (a problem known as “scope creep”). It also gives him a strong sense of what it is he’s paying for.

If writing your own contracts seems daunting, the Web is full of samples you can borrow and use free of charge or buy for a small fee. Point your browser to contracts.corporate.findlaw.com for samples, and consult with a lawyer to tweak them to your own needs.

Who Owns It? Pop quiz: A large hospital in your city pays you to build a database of patient records. You do, and three years later a clinic in a different state asks you to do the same. No problem, you say. You can recycle the first project and make a killing on the second—until you get sued by the hospital, of course, for giving their competition something they paid for. If you’re not careful with copyright issues, the bane of consulting work, you can end up in court.

Why? It depends on who owns your work and what your rights are to use it. Employees who work for companies have no right to their own work. Their e-mail, code, memos—even their Post-It Notes—are owned by the firm they work for, lock, stock and barrel. In contrast, writers and artists own all copyrights to their work. No one can use a novel or sculpture, much less make a profit off them, without the express permission of the owner. But when a consultant works under contract, the issues are cloudy and are governed by the law of Work for Hire.

Work for Hire is a special term of the 1976 Copyright Act. Under it, a consultant, whether he’s a musician, an ex-Green Beret or an ActiveX coder, must yield the copyright for his work to the company that pays him for it, but only if the work is called a Work for Hire in the contract itself. If those words are missing from the contract—something most clients don’t know to ask for—then you own the work and its copyright, and the client has nothing more than a lease to use it for the purpose you agreed to. If the client sells it, transfers it to another company for any money at all or pays another person to modify it, you may be entitled to sue for a share of the profit or even for damages. And under the law, you’re allowed to recycle your code or sell the product again, providing you follow the non-disclosure, trade secret and other provisions of your contract.

So what’s the bottom line? Never call your work a Work for Hire, and raise your eyebrows if the client does. Keep in mind that Work for Hire and copyright are murky, tricky parts of the law, so if you’re in the least bit of doubt, take the time to ask an expert attorney.

Don’t Litigate. Mediate. How much does it cost to go to court? Enough to hurt. A small problem can ring up six figures in lawyer’s fees in a heartbeat, and if you lose, you’ll have to pay even more. Worse, lawsuits take years and suck the energy from your life and business, much like a leech. But there’s a way to keep your clients, vendors and even your employees from suing you.

First, a little background. There are two forms of alternative dispute resolution (known in the legal trade as ADR) that can solve problems quickly without draining your wallet. The first is mediation, in which both parties agree to submit their problem to an impartial third party, often a lawyer or retired judge paid by the hour, who tries to broker a deal between them. Mediation is simple and cheap—a fraction of the price of a lawsuit—and protects you from runaway jury awards. It works like diplomacy: Two parties come together with the help of a third to cut a deal.

If mediation fails, you and your opponents can submit to binding arbitration. In arbitration you pay a specially trained lawyer to act like a judge. She decides the facts of the case and makes a decision that both parties are bound to, much like a court of law. But arbitration is faster—it can be over in weeks or months, not years—and far, far cheaper. And just like mediation, there’s no jury involved. (Remember that jurors are summoned at random from the county’s voting rolls. Are you ready to trust the fate or your company to people you could meet at the gas station?)

Given the blessings of ADR, how do you ensure you’ll be able to use it when you and your clients, vendors or employees get into a fight? It’s simple: Write a “dispute resolution clause” into your contract. In a nutshell, it states that all parties to the contract agree to mediate or arbitrate their disputes and refrain from all litigation.

Not to be trite, but an ounce of prevention is worth a pound of cure. The best way to stay out of court is to end a lawsuit before it begins, and ADR is a great way to do it. For more information, visit the American Arbitration Association at www.adr.org, or ask your